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Markets

Right on the Money

Crocs crumbles and Microsoft rallies, just as we predicted.

No sooner had we gone to press with the December issue than Microsoft reported blowout earnings for the quarter that ended September 30 (see The Changing Face of Microsoft). Microsoft (symbol MSFT) reported that its earnings per share jumped 29% and its sales climbed 27% from the same period the year before, spurred by unexpectedly strong demand for its Vista operating system and Xbox 360 video-game console. Microsoft hadn't seen growth rates like those since 2000.

Our upbeat story said the stock, at $30 when we went to press, would reach $35 over the next 12 months. It flew past our target, hitting $37.50 before retreating to $34 in mid November.

With the spectacular first quarter in the books, analysts fell over themselves raising earnings estimates and price targets. Microsoft, which trades at a reasonable 18 times estimated calendar '08 earnings, could easily hit $40 over the next year.

Our piece on Crocs in the same issue was cautionary, saying sales growth wouldn't "have to decelerate much to cause investors to flee." If anything, that turned out to be an understatement. After the close of the market on Halloween, Crocs released a financial report that looked as benign as a sugar-plum fairy trick-or-treating at your doorstep.

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But expectations for the rapidly growing maker of funky plastic shoes were so high that even beating analysts' profit estimates by 3 cents a share in the third quarter couldn't save shareholders. Revenues came in $2 million short of analysts' expectations, and Crocs said inventories had quadrupled from the same period a year earlier, raising fears that shoe prices might be cut. (Some of the extra inventory, Crocs said, was because of changes at its European and Japanese warehouses.)

Crocs stock (CROX) splattered like a rotten pumpkin, falling from a Halloween high of $75 to $38 in mid November. So, is the funky-shoe company a buy at its current price? It now sells at just 14 times estimated 2008 profits. And those profits, as well as sales, will rise 35% to 40% in 2008, the company predicts. Still, smart investors should wait a quarter or two for more surprises before dipping a toe into the Crocs pool.